A compensating balance: I.is required when a ﬁrm acquires bank ﬁnancing other than a line of credit.
II)increases the cost of short-term bank ﬁnancing.
III)represents an opportunity cost to the lending institution.
IV)is often used as a means of paying for banking services received.
A)I and III only.
B)II and IV only.
C)II and III only.
D)I and IV only.
E)I, II and IV only.

Question

Quizplus · Accepted Answer

A compensating balance increases the cost of short-term bank financing as it requires the borrower to maintain a minimum balance, and it is often used as a means of paying for banking services received.

A Compensating Balance: I